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After watching our parents retire and still have to make mortgage payments on a fixed income, my husband and I decided we would do whatever to prevent that for ourselves. So we approached our mortgages with aggressive and out-of-the-box steps that aren’t for everyone, but definitely worked for us.
For our first home, we bought a house that cost less than the mortgage we were approved for, nearly doubled our monthly payments to chip away at the principal, paid the money towards principal once we weren’t liable for PMI, and even refinanced. We managed to whittle the balance our $180,000, 8 percent fixed-rate, 30-year mortgage to $60,000 in only 10 years—saving hundreds of thousands of dollars in potential interest payments along the way.
But all of that changed when we had to move to Nashville for my husband’s new job. We walked away from our nearly paid-off home in exchange for a $150,000 down payment. The Nashville market was hot, but also way more expensive than the Atlanta suburbs (and with two kids we needed a bigger house). We found a $635,000 home we loved, put down $135,000, and applied for a new 30-year, 5 percent fixed-rate mortgage. Though we wished we could get a 15-year mortgage (we were so close to pay off back in Georgia!), we didn’t think it was financially practical or smart in a volatile housing market.
We ended up paying $3,600 a month—$1,000 more a month than we had been paying, and $2,000 more than we were required to pay on our old mortgage in Atlanta. We couldn’t afford to double these payments like we had done before, so we decided to stick to the scheduled loan payments—although we calculated we would pay an additional $512,000 in interest. This was overwhelming as it was all much larger to attack financially than our first home mortgage. But though the home was more expensive than we were used to paying, we again chose to buy a home below what the bank had approved us for, so we had some wiggle room.
When the economy tanked five years later, the housing market changed drastically: Interest rates dropped to nearly 2 percent… and our house value dropped by 15 percent. We looked to refinance again to lower our interest rate, but an appraisal was required with closing costs close to $10,000. We decided it wasn’t practical and that money would be better invested in paying off the principal.
So I started researching other options and found a little-known process that would essentially do the same thing for just $100 in fees: Recasting, or when you pay a large sum of money into your mortgage and it directly affects to the principal amount. While the loan’s term doesn’t shorten, the entire large payment goes to principal instead of interest. And since bank interest rates had also dropped significantly, we figured we would get more bang for our buck putting this cash towards our mortgage than if we let it sit in savings.
Thankfully, the tech industry was doing well—and my husband’s job gave us annual bonuses and stock options, and we decided to use some of this extra money to make a dent in our mortgage. After consulting with our tax attorney and lender, we took $200,000 we had saved up over the years and recast: Our monthly payment amount dropped in half!
And yet, we still paid $3,600 a month. And then, within two years of that recast, my husband was laid off and received a large severance. Thankfully, he had another job lined up, and we were able to use that money along with other savings to pay off the mortgage!
Life After Mortgage
But we weren’t home free yet: Even though our mortgage was paid off, our equity in our home was less than we had paid for it—and it would take a full decade for the value to return to what we paid for it (and thankfully, only two years later it’s worth $100,000 more!) And since we dedicated a lot of our savings into our home equity, we didn’t have as much cash on hand as we would have liked. So, at our lender’s advice, we opened up a $50,000 home equity line of credit to provide us with some liquid assets. We also had to look at how this affected our credit scores because we no longer had any monthly loans (we had no car notes or revolving charge accounts either). Though there was an initial dip after the payoff, our credit score managed to say in the low 800s even without any installment loans.
But all in all, it felt great to not have the overhanging pressure of a large monthly payment—especially when my husband was laid off a few years later. We still do have to pay taxes and insurance (about $6,200 a year, which we pay in a lump sum in the beginning of the year—never a fun thing to do after the holidays). But it’s a great relief to have an extra $3,800 each month to put towards our other savings goals like college planning, major home projects, emergency funds and retirement savings. It truly feels amazing being mortgage free by 45 (instead of 65, like we had originally expected) and truly phenomenal to see how much we saved!